Credit-Default Swaps in U.S. Rise for First Time in Three Days

By Sridhar Natarajan -
Jun 7, 2012

An index of U.S. corporate credit
rose for the first time in three days, reversing declines in
late trading. The gauge fell earlier as China cut interest rates
for the first time since 2008 to curb a slowing economy.

The Markit CDX North America Investment Grade Index, a
credit-default swaps benchmark that investors use to hedge
against losses on corporate debt or to speculate on
creditworthiness, rose 0.2 basis points to a mid-price of 121.9
basis points at 5:04 p.m. in New York, according to prices
compiled by Bloomberg. The gauge had fallen by as much as 3.1
basis points earlier in the day. Swaps tied to Capital One
Financial Corp. (COF) decreased by the most in almost five months.

China’s benchmark one-year lending rate will drop to 6.31
percent from 6.56 percent effective today, the People’s Bank of
China said on its website. The move comes as investors have
pushed the U.S. swaps measure lower from a more than five-month
high of 127.5 basis points June 4 on speculation of increased
support from global central banks to boost growth.

“It was taken as a positive that the Chinese are going to
attempt to stimulate their economy,” said Robert Grimm, a
trader at broker-dealer Odeon Capital Group LLC in Greenwich,
Connecticut. “It was kind of a surprise move because they
haven’t done it in four years.”

The Federal Reserve will need to assess conditions before
deciding if more measures are needed to support economic growth,
the bank’s Chairman Ben S. Bernanke said in testimony to
Congress’s Joint Economic Committee in Washington.

Monetary Tightening

Recent comments from Fed governors indicate the bank may
push back its guidance on the timing for future monetary
tightening, according to a report today by JPMorgan Chase & Co.
analysts led by Eric Beinstein.

The cost to protect against losses on the debt of Capital
One fell by the most since Jan. 19. Credit-default swaps on the
bank declined by 6.4 basis points to a mid-price of 94.2 basis
points at 5:06 p.m. in New York, Bloomberg prices show.

The swaps gauge typically falls as investor confidence
improves and rises as it deteriorates. Credit swaps pay the
buyer face value if a borrower fails to meet its obligations,
less the value of the defaulted debt. A basis point equals
$1,000 annually on a contract protecting $10 million of debt.